GameStop shares plunge 39%; analysts say 2019 could be challenging

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(Reuters) - GameStop Corp shares plunged as much as 39% and were set for their worst day ever following its weaker-than-expected quarterly sales and dividend halt, and Wall Street analysts said 2019 could be a very challenging year for the company.

The share slide wiped off more than $315 million from the company’s market capitalization and at least six brokerages cut their price targets on the stock.

“Patience is thin given fears around the digitization of gaming and given lags in assessment, plan development and execution...GameStop now faces the need for a dramatic pivot, wholesale changes, and aggressive action to remain relevant,” Jefferies analysts said.

The gaming retailer continues to struggle with a changing video game landscape and emerging technologies like game-streaming and has seen a slew of management changes after its Chief Executive Officer J. Paul Raines passed away last year.

The company has been cutting costs to remodel itself under its latest chief executive officer George Sherman, but investors are pessimistic that its core business of selling physical video games and hardware consoles can get back on track.

“Overall, the combination of the transformation initiatives, ongoing consumer shift to digital gaming, and current console cycle being in the very late stages are likely to make 2019 a very challenging year for GameStop,” Telsey Advisory Group analysts wrote in a note.

Chief Financial Officer Rob Lloyd said on Tuesday consumers were postponing their console purchases as they awaited new versions of PS4 and Xbox One. The current models from Sony Corp and Microsoft Corp are in their late stages.

Benchmark analysts said the latest management team “iteration was uninspiring and lacked any coherent articulation of a tangible vision on how to transform the business.”

“The only impactful transformation we see in GameStop’s future is the industry’s on-going transition to the digital economy, a viable scenario where GameStop has little value.”

A GameStop store is photographed in Austin, TX, U.S., March 26, 2018. Picture taken on March 26, 2018. REUTERS/Mohammad Khursheed

GameStop said its dividend stoppage will save about $157 million per year, besides helping in cutting its debt of nearly $500 million.

Credit Suisse analysts said the dividend elimination was not entirely surprising, but acknowledged that the move to pay down debt is prudent.

“That said, the implication that dollars may be reallocated to transformation initiatives, adds risk at a time when gross profit is already declining. Where that shakes out for 2020 will be key,” CS analysts said.